June 15, 2022
By Marc Irisson, Partner Translink Corporate Finance in France & Translink International Board Member
Cross-border M&A activity in the IT sector will continue to boom for years to come. Given the scale of market growth and the formidable pace of technological evolution, investors are seeking to acquire competitors with the competencies they need – there’s a cutthroat ‘buy it before it kills you’ approach. New players are entering the scene in growing numbers. Indeed, starting an IT business can be capital expenditure light and start-ups tend to grow fast. Now, the first so-called unicorns are set to be sold or exit their financial sponsors. It will be fascinating to see if they deliver, and the inevitable impact this has.
Top trends in the IT space right now
The broad term ‘IT’ comprises IT services, software, and the telecoms business.
In terms of IT services, cybersecurity remains a major trend. ‘The cloud’ also continues to be top of mind as more choose to migrate – it’s a very active area, with a lot of growth forecast.
The software industry will continue to revolve around all things SaaS (software-as-a-service), with extreme emphasis on hypergrowth. Across Europe and the US, companies are aiming for at least 30 to 50% growth per annum. This is fuelled primarily by M&A or significant raised capital.
In the telecom industry, we’re seeing the multiplication of data centres across all nations, now often manifesting as smaller centres with increased focus on going green. Covid-19 catalysed a pressing need for close collaboration between remote-working teams, which has meant the industry has had to become more user-centric, with a plethora of cloud-based solves.
Big movements in M&A
Clients across the globe want to be as big as possible as fast as possible. Many mid-size companies work for large corporates that want an on-the-ground presence in multiple jurisdictions. That’s driving considerable cross-border M&A uptake.
The pace of technological evolution means companies struggle to keep up with the competition so, they buy the competition. This, in a bid to ‘own’ the market and acquire the requisite competencies, rather than spending millions trying to innovate themselves.
Then, of course, there are the cybersecurity concerns which are influencing major M&A developments as well.
A further massive trend and M&A driver is the competition for talent. There’s a lack of human resources, so acquisitions serve to accrue the workforce companies need. Employers that are more flexible in adapting to current (and future) workforce trends have a clear advantage.
This industry attracts innovators. People who build businesses, sell these, and then have another big idea, so start another new venture. We’re about to witness the first ‘unicorns’ being able to exit their financial sponsors or go through M&A. Time will tell if they deliver on the hype, in terms of growth and scaling capacity and what this means for the future of start-ups hoping to raise equity. Going forward, we’ll be able to make a more educated guess around business plans and promises, which will inevitably affect valuations.
Speaking of valuations, we’re seeing valuations of companies at 30 to 40 times their annual recurring revenues. When you do the maths, this means they’re sometimes valued at something like 500 million Euros, but have a staff complement of under 100 people. It doesn’t always add up. There’s a trend right now of listed companies delisting to go private, after they’ve experienced challenges doing M&A due to their stock exchange valuations. They would rather go back to private equity, so they can buy companies on lower multiples.
If we look at the trend, we see an increase of deals at higher valuations, across IT services, software, and telecoms, from the acquisition of INETUM by Bain Capital, to Microsoft’s $19.7 billion acquisition of Nuance Communications, and Zayo’s intention to buy Intelligent Fiber Network. The biggest drivers? The amount of capital in the market and the growth outlook of these markets. This needs to be invested. And there’s more demand than supply. It’s basic economics. Central banks across the globe are starting to raise their rates, but these remain low. So, we’re likely to see an explosion of M&A activity in the next month.
Environment, social and governance (ESG) factors will also come to the fore. The environment is already a massive consideration and will become even more so, led by consumer and investor demand, plus regulation. Mostly, consumers are driving this change.
In terms of governance, we’ll also see more people getting to grips with new regulations around data privacy and protection. The recent Privacy Act between Europe and the US is causing some uncertainty, so we’ll have to see how this transpires.
Navigating the new
Translink is your partner in IT M&A. We have offices around the world, with experts with deep, local, sector-specific knowledge. We have a successful track record of advising clients on the buy side across Europe and beyond. With a successful track record advising clients on the sell side too, our global footprint means we can find the right buyer across 35 countries and counting. A key driver of M&As is the goal of international expansion – let us partner you on the journey.